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The Information Technology Productivity Paradox Analysis Economics Essay

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The productivity paradox in information technology (I.T) is the view that there is no link between increased investment in I.T and productivity. As highlighted by Erick Bryanjolfsson it is the clear disagreement among the significant advances in computer supremacy and the comparatively dawdling development of productivity at the level of the total economy, entity firms and numerous specific applications. The relationship between the two has led to a host of explanations but the results show that there is little consent. It has been disputed that that even after the discovery of I.T in a large amount of business in the present day yield particularly in the service segment has been sluggish. The paradox therefore questions the offerings of IT to financial output and production, supported by the truth that there has been a noticeable deceleration in productivity growth regardless of huge and mounting savings in I.T. Productivity can be defined as the primary assessment of a technology’s input. Recently, enormous investments in computers and related technologies have been questioned by CEO’S as well as line managers. Even if there are other winning cases, it can also be taken into consideration that these are equivalent to impressive malfunctions as well. Deficiency in high-quality quantitative gauge for the good productivity and value created by I.T( Information Technology) has made the MIS j(Managing information systems)job of justifying investments easier said than done.

The central question is therefore whether there should be continued investment in I.T and whether computers lead to improved productivity and this can be only accessed in the long run. The only way to measure productivity growth is by determining the living standards and the prosperity of country. The prosperity of a company relies on its capability to convey added genuine value for stakeholders with the minimum labor, capital or other inputs. By definition, productivity is the quantity of yield created per unit of input and this is complicated to evaluate particularly in the present day economy.In this document I am going to analyse the productivity paradox and consider whether the influence of management process that comes with savings in IT have been determined so much by organisational requirements as by the opportunities offered by IT, by crude, traditional technical determinism, in fact. This may assist in enlightening on why numerous of these techniques seem to fail in view of the organizational requirements by which they are defensible.


With the increase on investment in it is most like that the organisations will shift more and more into a technology-based operational settings. Of utmost importance is how to measure and evaluate the value of IT. We are going through an era where information systems should not be seen as structures for support but as services that have a leading function in the strategic mapping procedure of every organisation. Due the shortcomings of the I.T productivity paradox it is essential to combine the best that we know about IT evaluation practice in a comprehensive and integrated manner, and also provide new ways forward. The best way to fully understand the productivity paradox is through analyzing and comprehending techniques of IT measurement utilized. The best method to assess progress should not only disclose that IT has time and again been extra industrious than is believed, but should also pay attention to ways in which these benefits can be advanced across the IT systems life-cycle


Development, and better risk analysis; sourcing, including IT outsourcing; and infrastructure, including transforming an organization’s IT architecture are vital areas where improved evaluation is necessary. There is also need to consider stakeholder interests as an integral part of the on the whole assessment process. Productivity paradox can be understood better by analyzing the methods of IT measurement utilized. Improved measurement can not only disclose the benefits that IT has offered or is believed to offer in enhancing productivity but should also pay attention to ways in which advantages can be developed across the IT systems life-cycle. To cover areas that call for advanced measurement is vital so as to encompass issues such as development, and better risk analysis; sourcing, including IT outsourcing; as well as infrastructure, including transforming an organization’s IT architecture. Stakeholder interests should also be carefully considered as a part of the overall evaluation process. As IT productivity paradox gains prominence it is will add value to IS as a subject if organizations undertake analysis as well as assessment on their expenditure on IT.


The important of investing in computers so as to increase productivity has been questioned several times given the fact that productivity is not the only organizations goal but just a part of chain of activities that an organization has to embark on. The answer to this is that the organization’s long term goal is to maximize productivity thereby improving the living standards and the wealth of nations because there is a link between what a nation produces and what it consumes. For a business to be successful it has to be efficient in delivering more real value for customers devoid of using added labor, capital or other inputs. A study was undertaken so as to determine if computers are really living up to their standards and this was done by studying extensive data sets which enclose hundreds or even thousands of observations.

The greatest question though is, are computers living up to their expected standards. Evidence of victory can be seen in computer companies like Dell and Cisco via the Internet. These companies are making billions of dollars. Contrary to this are also cases of abandoned as they were not meeting expected standards. A number of writers encompass still illustrate the thought that computers have considerable company advantages as “the big lie of the information age”. A better way to determine if computers are living up to their promises is by analyzing numerous studies that were formerly brought forward at the Workshop on Information Systems and Economics (WISE). At this workshop a wide on Information Systems and Economics (WISE) transversely a broad variety of technologies and these which contain hundreds or even thousands of observations. The results indicated that there has been improvement on return from computers.

The central question therefore is does it pay off to invest in computers and how can organizations optimally utilize computers. It can be safely stated that the maximum return from computers are realized when computer investment is tied with other harmonizing savings in areas like new strategies, new business processes and new organizations. These are of utmost importance need to attain maximum benefit from IT. However this change is seldom easy given that a lot of organizations will need a time of reengineering, restructuring and organizational redesign in order to best utilize their IT investments.


In the 1970 and 1980 era it can be noted that the quantity of computing supremacy per white-collar worker in the service industry was growing radically yet the measured productivity of this segment was flat. The remarkable rise in computerization has had minimal consequences on economic performance, mainly for those subdivisions of the economy with great numbers of “information workers” In some studies it was indicated that there is slight confirmation of a connection among computer investment and productivity basing on data from studies on computer investment in manufacturing industries or in a sample of business units of large firms. A small number of studies found positive effects on transitional issues such as cost efficiency or market share, but it was still complex to tie these paybacks to investment in I.T. As much as there were positive results there was also little evidence that computers were unproductive. Seeing that the extent of IT investment is increasing it can be noted that there are still systematic preconceptions in conventional productivity measurement that hinder an exact evaluation

A large amount productivity metrics are revolving around counting stuff like number of employees, pounds of nails or quantity of checks processed. Using these matrixes computers should allow firms to produce more of e same product at lower costs for them to be viewed as productive. The banking sector is good evidence that investment in I.T leads to improved productivity. When ATMs were introduced it reduced the amount of checks banks process so, by some measures, banking output and output decreased. The rise in convenience ATMs have created will not go unnoticed in conventional productivity metrics. Given that the collective level of the true output of banks is complex to gauge, most conventional analyses have revealed that labor productivity has essentially been flat. It is so apparent that given fact that the costs of computer investment cannot be easily accessed and it also takes time, IT may seem to be a dire investment.


Researchers later realized that it made more sense to focus on IT speculation performance and productivity of great numbers of industries as compared to dwelling on advanced level aggregate like manufacturing industries or the entire nation. The micro-level approach was advantageous in that information permitted analyses to be undertaken on a large number of firms over quite a number of years. Firm level data also permits the measurement of a few of the indefinable value that was being produced by computers yet if this worth may perhaps not be openly detected. In situations where consumers are prepared to disburse additional funds for the addition in value or convenience, then a company’s earnings will mirror a number of this increase in indefinable value. These disparities will not show at the industry level; high brilliance companies will compel low inferiority firms to lessen their fee to stay aggressive. Consequently, on the whole business revenues will not essentially add to as firms computerize. Though a certain portion of the cost from IT investments undertaken by organisations and passed on to customers in the course of competition and will not be observed some of this indefinable value can be taken into account in firms-level productivity measurements.

Research has indicated that a dollar of IT investment is linked with a considerable boost in proceeds every year.( Brynjolfsson, E. and Hitt, L 1995) From these studies it can be concluded that IT has a helpful and noteworthy effect on company output refuting claims of a “productivity paradox”. From these reports it can be evidenced that highlight that the returns from IT appear to be quite soaring and it is highly likely that computers are not only pulling their weight but contributing significantly. It should also not be ignored that returns may represent more than just the profits to the technology. Technology is just an element of an IT investment and more often than not huge expenditures on training, procedure redesign and other organizational alterations that are coupled with systems investment.

However this does not refute the opinion that computers add to enlarged yield but it does make accurate rate of return computation more complex.


Nevertheless the fact that computers appear to be productive cannot be the only basis that an IS manager can make good investments banking on. In actuality, the complexity of creating the overall worth of IT possibly will be a indication that the worth that IT convey to an organisation differ very much from company to company. It can also be noted that this varies across the board since a number of firms undertake soaring IT investments and are highly productive while as others have comparable investments but have bad performance. This discrepancy can be explained by looking at the various benefits that I.T brings to organisations and assess whether they are unique to that particular firm or these benefits are realized due to due to variation in spending across firms.

The most appropriate way to explain this discrepancy is that about half of IT cost is owing to exclusive uniqueness of companies, while the outstanding division is shared usually by all companies. There are also determinants external to the firm that have a substantial influence on the productivity of IT investments. To get a enhanced description of the managerial determinants that influence IT worth it is essential to scrutinize the connection of IT venture to production in different points in time. If organizations would get profits as soon as they invest in I.T then it was going to be easy to measure return from I.T. Nevertheless, if there is time lag or adjustment time required to match organizational aspects and IT investments as a result benefits are noticeable over longer time periods. Given this investment in I.T is time consuming and costly. It can therefore safely be argued that the long term payback is not just the proceeds commencing from IT but proceeds from a system of technology and organizational changes and learning. In conclusion for each dollar of IT there are numerous dollars of organizational investments that when combined, generate the large rise in measured firm productivity and value.


Restructuring of several organizations is therefore predictable given the diffusion of IT into the workplace and these will resultantly lead general changes in the economy as well. Firms that undertake high investment in technology are more and more shifting in the direction of flatter, less hierarchical organizations where extremely experienced personnel take on growing levels of decision-making responsibility. Comparable thoughts lie beneath added organization style like industry procedure revamp, the appearance of high performance work systems and the shift from mass production style manufacturing to flexible modern manufacturing (.David, P. A. 1990) In practice, these all characterize organizational transformation that use low cost interactions and information processing potential produced by IT.

Companies that decide to decentralize execution and encompass workers with superior height of talent and learning come out to invest more in information technology. Regardless of how IT is deliberated, there is a regular encouraging association among the use of these technologies and these entail the utilization of self- managed teams, empowering individual to make their own decisions and determine their pace of work .The organization also has to increase investments in training and screening for education when employing as well as setting up incentive that encourage high team performance. This is because companies that recruit an enormous amount of workforce especially specialized workforce, or make use of technology- and skill-intensive manufacturing procedures will possibly use additional IT and take on decentralized structures. Currently relationship between I.T and new organization of work can be forecasted by the composition of the work force and is present within and between various industries.

Organisations undertaking the new work practices are careless users of IT; they squander too much or are too fast to take on diverse administration practices as well as IT venture and the innovative employment practices. Given the trend that there is an increased investment in I.T as well as increased benefits from investment in technology over the coming years it is therefore necessary for organizations to sort out in ways that leverage the value of IT. Some organizations prefer to maintain the status quo because these organizational changes are time consuming, risky, and costly. It is also complex to redesign infrastructure, reinstating employees, altering essential firm practices such as enticement compensation and back-up systems and undertaking a revamping of central part of business procedures.


There are some notable cases where by organizations undertaking expensive investments in I.T but no major growth in neither productivity nor flexibility is attained. This is mainly because work force maintained the old ways of doing things. In most cases workers are not willing to embrace change and no interest in having more decision-making errands. The biggest cost therefore in trying to implement change in an organization is not purchasing computerized equipment but successfully managing this change so as to attain production goals. When firms undertake investments by developing a latest process in I.T as well as transforming their employees or crafting innovative organizational structure these benefits are realized after a long time period of time. Therefore organizational assets should be harmonized to information know-how assets for them to be maximally utilized.


There had been intense research on the relationship between investment in I.T and productivity. However there has been an extension from I.T and productivity to how much more computerization is necessary for an organization to achieve its goals. Computerization does not involuntarily boost yield, but it is a necessary factor of a broader structure of organizational changes. We are now witnessing greater and therefore it is important to have all-encompassing practices as well as taking into consideration these organizational changes as an integral part of the computerization process.


Fig 1

Adapted from

Fig 1 above illustrates calculate approximate of the productivity growth contribution of IT capital. These guesstimates are computed by linear regression and the different lines represent different statistical techniques. Ordinary least squares (OLS ) and semi reduced form(SRF) are the same. However in this calculation labor costs were not computed in the list of inputs to reduce prejudice on the IT approximation. (I.V) represents instrumental variables regression which is an alternative way of addressing reverse causality (Dewan, S. and C. Min 1997).


The existence of the productivity paradox remains disputed and what the most economists feared that it would extend the “productivity paradox” would extend into the early 1990s appear to have become a reality as the paradox continued up to the end of the decade. Martin Neil Baily chairman of the Council of Economic Advisers during the Clinton administration (1999-2001) describes how the rate of productivity increases, which had been growing since the end of World War II, suddenly tailed off around 1973. An account by the Bank of Montreal propounds that productivity growth rates have stayed the same at about 1.0% when deliberated by means of labour-based output and about 0.5% when measured using multifactor productivity from 1973 through to 1997.

The above findings are report throughout most studies in I.T and productivity. However others have argued that different sources have come up with different values for productivity. In Canada the Bank of Montreal has produced results that Canada’s productivity has been declining since 1979 but many economists have dismissed these findings as they view them as unreproducible. In measuring the contribution of investment of I.T to organizations “labour-based” measurement was used and this has proved to be inadequate since it does not report some important information. Using this labour based approach by taking what the economy produces devided by the labour needed to produce it. This doesn’t take into consideration issues such as long-term capital investment and resource reduction and as a result economists have come up with a new form of compute productivity, called “multifactor” productivity. The “multifactor” takes into consideration disparity among outputs and a weighted sum of the various characteristics that are deliberated to bring into about those outputs that is capital investment, labour and the utilization of natural resources.

The “multifactor” productivity creates a more realistic picture although it is still difficult to compute and it is highly prone to inaccuracy. Some organizations still use labour based productivity to assess productivity, particularly when undertaking research. In the U.S. and Canada, multifactor analysis time and again reports lesser productivity values than labour-based dimensions. After the analysis of the “multifactor” ratio to productivity it was noted ratio of multifactor productivity to labour-based output has been relatively steady for the years after the second World War. Multifactor productivity study allegedly takes into account additional automation impacts on output by captivating investment in new technologies and which it measures as capital

Nevertheless, even multifactor analysis does not provide an entire image that the impacts of computers have on productivity .They are still too inadequately measured for computerization benefits to appear up in productivity statistics. The only way to overcome this to undertake a proper measurements of IT that are not assured to bias productivity capacity upwards, making computerization look better in productivity figures. Therefore a need for people to develop superior ways of assess computerized productivity are developed. Also the unspoken impacts of computerization will prejudice productivity measurements one way or the other.

Other proponents have chosen to view the contribution from computers from a positive view proposing that computerization has helped increase output since it was launched, but that the proceeds are not calculated well by current indices and these were premeditated to evaluate output in terms of material commodities, not information. The studies undertaken by IBM point out to a well-built association among productivity growth and technological investment. These studies acknowledge that productivity has been slow, but as common they forecast superior productivity increase as automation turn out to be more extensive.

The IBM study also looked at the aspect multinational output dimensions to distinguish whether the productivity paradox is defensible on a worldwide degree. Technological savings was accountable for one-third to one-half of the total productivity increase in numerous countries. The research further propounds that its conclusions are noteworthy since IT capital venture made up only 5% of total GDP for the countries analysed. There is still room for this research to gather data universally and comment on global since most productivity paradox research is basing their researches on the United States. IBM has undertaken partnerships with esteemed academic organization and world-renowned economists give the research project reliability and the studies concluded that technological venture had no effect or shoddier and unhelpful consequences on productivity.

In the past 15 years, and that the U.S. is in a intermediary condition among a manufacturing-based nation and an information-based “New Economy.” (Jack Triplett , 1999) and he attributes this to the productivity paradox. However he also agrees but agrees with IBM’s view that divisions that spend a lot in technologies have benefited from bigger productivity increases than their counterparts who did not advance in computers.

Some economists argue that the product that the productivity gains from computerization are not imminent but they eventually be evidenced in productivity statistics, after businesses and societies attuned themselves to make use of the latest technology.


Conference on Service Sector Productivity and the Productivity Paradox argues that the introduction of electric power was not comparable to that of computerization since value of computers went down much more hurriedly than they did for electric power. It is therefore further explained that the prologue of electric power was not comparable to that of computerization since prices of computers fell much more hastily than they did for electric power. This is because electric power was used to new purposes, and did not substitute steam-power purposes, while from the beginning computers were publicized as substitute for existing applications. Arguments supporting the acceleration of computers should be reflected in gains from technology

Therefore productivity can be obliged to technological transformation and that computerization enhancement will be entirely realized when the change to the New Economy is entire. However this approach has its shortcomings it doesn’t consider “productivity sinks” such as game-playing and idle web-surfing that detract from productivity. (Robert Hogue, 1999) .It does not take in hand the

view that computers are not bringing about additional jobs than they save, and that companies will not wrestle for presented market share as compared to captivating new markets. This is a pointer that that the paradox solution has not been found until now since it does not address the issue that that computerization leads to a decrease of yield since computers must be reinstated regularly, with slight valid advantages to every improvement.

Given the above I can safely state the paradox has not been resolved until now. Even though ways of incorporating technological investment into productivity statistics have enhanced, and even as at hand are some signs that possibly computers have been advantageous at civilizing productivity, at present there are quite a number of outstanding unanswered questions. These include whether expecting huge gains in productivity are practical.


Therefore, it can be noted that computers are everywhere although their contribution is normally ignored when it comes to productivity statistics. Productivity matrices do not seem to show any impact from new computer and information technologies has been termed it the “productivity paradox.” Due to the decline in productivity preceding the computer era yet investments in information technology have drastically increased is evidence that information technology has no impact on productivity.

Advocates against the paradox state that the major reason for the failure productivity paradox rests on the fact that the U.S. financial structure is neither entirely in the previous automated financial system nor yet in the new digital economy. Until recently, it has demonstrated complicated to initiate the kinds of productivity-boosting technologies in a lot of service sector that are used in manufacturing.

However the contribution of computers to production should not be completely ignored. We have witnessed growing by a rare of about 1.1 percent per year in the 1960’s that is in sectors that had heavily invested in computers as computers were contributing remarkably to firm-level output and productivity. With globalization and as the world is shifting to a more digital economy, the results are possibly going to be experienced economy-wide. With the invention of more computers and the digitization of the economy in the 21st century seems to bring the kinds of financial profit to Americans that computerization brought in the 20th. When this takes place, the productivity paradox possibly will very likely give way to a productivity and wage boom. Also administration can undertake a significant function in making it simple the shift to a computerized economy by undertaking laws and regulationsthatopenlysustainandprogresselectroniccommerce

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